A Downsized Public Workforce May Be a Permanent Consequence of the Recession

State and local governments still haven't regained many of the jobs they cut, and they're unlikely to anytime soon.

When the economy first began unraveling during the Great Recession, most governments didn’t feel it right away. Then, as revenues began to tumble, states and localities cut back on services, implemented hiring freezes and left vacancies unfilled. By 2010 and 2011, many state and local governments were shedding staff and making sizable cuts to agency budgets.

The economy since then has recovered at a sluggish pace, but governments have recuperated even more slowly. Today, many jurisdictions continue to operate with staffing well below pre-recession levels. Given that this month marks the 10-year anniversary of the official start of the recession, it’s worth considering whether limited staffing and resources can ever rebound fully, or whether they have become a more permanent fixture of the public sector.

There are about 7.5 million full-time equivalent state and local government workers, excluding those in education, according to last year’s Census Bureau survey of governments. That number is 3 percent below the levels of March 2008, shortly after the recession began. Taking population growth into consideration, noneducation local government employment per capita is down about 8 percent, while state employment is nearly 11 percent lower.

Several compounding factors have constrained public-sector staffing levels: Income tax revenue growth remains weak; property tax collections for many jurisdictions aren’t keeping up with the demand for services -- hampered in some places by laws placing a cap on rate increases; and sales taxes are growing sluggishly, partially because of shifts to e-commerce and untaxed services. As a whole, state revenues just haven’t tracked broader economic growth, says John Hicks, executive director of the National Association of State Budget Officers (NASBO).

Rising pension and health-care costs are also making it difficult for states and localities to fill vacant staff positions. For state governments, it’s Medicaid that’s eating up an ever-larger share of the budget. “There’s a crowding out effect,” Hicks says. “The rest of the government has been living with flat or declining [spending levels].”

There aren’t a lot of reasons for optimism, either. Most state governments reported revenues coming in below original projections earlier this year. Governors’ budget proposals called for just a 1 percent uptick in general fund spending for fiscal 2018, the smallest recommended increase since 2010, according to NASBO’s Fiscal Survey of States.

Cities find themselves in a similar situation. Christiana McFarland, the National League of Cities’ research director, says that she’s starting to see revenues contract, signaling more difficult times ahead. “Generally speaking, we may be in a new normal in terms of what personnel levels look like,” she says. The association’s annual survey of finance officers found cities budgeted lower property tax revenue growth and expected declines in both sales and income tax revenues this year.

Personnel downsizing has extended across different areas of government unevenly. Census Bureau data shows a particularly large cutback of 9.2 percent since 2008 for those classified as state and local government “highways” employees, which includes most public works functions. Administrative and non-sworn police employees have suffered similarly large reductions. On the other hand, state-funded higher education has yet to experience a national slowdown in hiring. Areas such as parks and recreation, relying more on user fees, also have weathered the recession better.

Some governments in states that sustained major property tax losses from the housing market collapse, including Arizona and Florida, haven’t come close to recovering those losses. The Census data indicate Arizona, Massachusetts and New Jersey have suffered the largest declines in combined state and local government employment, excluding education, since the start of the recession in early 2008. Only Colorado, North Dakota, Texas, Utah and Washington, D.C., have seen their public-sector workforce expand more than 5 percent over that time period.

In other places, the gradual shrinking of government payrolls began long before the recession. For Michigan’s local governments, it started in the early 2000s. Mounting cuts to aid from the state accelerated around that time. Shanna Draheim, the Michigan Municipal League’s policy director, says the recession only exacerbated existing structural problems. “The system as a whole is broken,” she says, “We can’t track with the economy.”

Meanwhile, localities’ legacy costs continue to climb, with infrastructure, pensions and other line items siphoning away more dollars. Michigan’s local leaders worry the situation isn’t sustainable over the long term without more state aid. “I don’t think any of them are accepting this as a permanent reality,” Draheim says. But it has long since ceased to be a temporary phenomenon.

The challenge for governments continues to be maintaining service levels with fewer resources. Some jurisdictions have responded by pursuing shared service agreements or partnerships with nonprofits, while others have sought efficiencies through technology and performance management initiatives.

The public’s expectations certainly haven’t waned. A Pew Research Center poll conducted earlier this year found 48 percent of Americans prefer a bigger government providing more services. That exceeded those preferring a smaller government with fewer services (45 percent) for the first time since late 2008. Many may be assuming, incorrectly, that their governments are fiscally strong if the local economy shows visible signs of growth.

All of this raises a crucial and worrisome question: Are governments any better prepared for the next recession than they were for the last one?

The good news is that states have managed to bolster their reserves. The median rainy day fund balance as a percentage of state spending has exceeded its high from the last decade, according to NASBO. And a few sources of revenue, albeit relatively small ones, are increasing. Many states are collecting more online sales taxes and expanding taxes on digital services, while others have sought additional gaming revenue.

Local governments aren’t in a better position to weather the next downturn, but they may be more prepared in terms of management, says McFarland of the National League of Cities. Managers who worked through the last recession have proceeded cautiously. Rather than staff up, they’re relying more on contractors and temp workers.

By now, suppressed staffing levels and diminished resources have persisted long enough that employees of affected jurisdictions have grown accustomed to them. Given the not-so-rosy financial outlook for many states and localities, it’s a reality that’s unlikely to change anytime soon. “There may be an acceptance of where we are right now,” says Elizabeth Kellar of the Center for State and Local Government Excellence, “and an effort to see what we can do under the new circumstances.”